Financial market regulation in the digital age

Regulatory frameworks and values have become increasingly important since the financial crisis. Massive investments have flowed into the regulation of financial markets but usually without visible added value. Does that imply that financial markets should not be regulated? In my view, no. Measures that reduce the risk of renewed difficulties in the global financial markets have fundamental social benefits, and appropriate industry regulation is indispensable, particularly from an economic perspective.

The biggest challenges are finding the right level of regulation and the most efficient way possible for companies to implement them. Increasing regulatory complexity, the variety of tools and products, new business models and players plus increasing digitalization complicate the situation. For me, uniform regulation is not only necessary, but above all there must be a simplified set of rules that create clear boundaries and are quick to implement. While some are already having discussions on a so-called “over-compliance”, others are probably looking for loopholes.

Keeping pace with progress

A key step would be to improve the regulatory standard-setting process in order to keep pace with change and avoid putting the brakes on innovation and development. For this, regulators need to understand the financial sector and all its technologies, seek dialogue with the different stakeholders, and examine the impact of new regulations in a timely manner and adjust them accordingly. Otherwise laws will be adopted that are no longer up-to-date when they take effect. Potential measures include shortening and simplifying the legislative process in the digital domain. The rapid development of new technologies such as blockchain, resulting in new business models, place ever more demands on legislators. It is imperative to create a common understanding of how to regulate the newly emerging markets without slowing down the use of new technologies.

New regulations and business models

A “one-size-fits-all” approach is pushing many institutions to their limits, explaining the burgeoning discussion, especially in Germany and England, regarding relief for smaller banks. In particular, talk concerns capital requirements, and it is here that both regulators and banks need to consider other models. This is best seen in the post-trading sector, where the cost of regulation and the procurement of technology can be substantially reduced by collectively providing the relevant services. In the end, there are positive examples of regulation such as the regulatory reporting in Austria, where a service company operates a common platform for a majority of the banks on which the reporting is handled. The banks have the certainty that future requirements of the Austrian National Bank are covered and at a significantly lower cost than in-house operations. I am convinced that this approach could be an attractive and viable option for other markets. The prerequisite for this success story was the creation of a meaningful framework that serves the purpose of all concerned stakeholders.